Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Nucor's (NYSE:NUE) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Nucor is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.34 = US$6.8b ÷ (US$25b - US$4.8b) (Based on the trailing twelve months to October 2021).
Therefore, Nucor has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 17%.
In the above chart we have measured Nucor's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Nucor.
What Can We Tell From Nucor's ROCE Trend?
Nucor is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 34%. Basically the business is earning more per dollar of capital invested and in addition to that, 53% more capital is being employed now too. So we're very much inspired by what we're seeing at Nucor thanks to its ability to profitably reinvest capital.
The Bottom Line
All in all, it's terrific to see that Nucor is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 100% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you want to know some of the risks facing Nucor we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.
Nucor is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
What are the risks and opportunities for Nucor?
Price-To-Earnings ratio (5.9x) is below the US market (15.5x)
Earnings have grown 42.6% per year over the past 5 years
Earnings are forecast to decline by an average of 52.1% per year for the next 3 years
Significant insider selling over the past 3 months
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.